An objective look into the impacts of forking blockchains due to malicious actors

Changes to a cryptocurrency which change its fundamental nature can require a “fork”. This term refers to the splitting of the blockchain into two new chains, one using the previous definition, another the new definition. This can be beneficial to enable a coin to overcome unforeseen challenges, but has significant risks as we will explore further in this paper.

Introduction

This paper will consider the complex nature of forking and discuss the philosophical, moral, and potential legal constraints surrounding forking a blockchain in order to roll back a blockchain as a result of malicious actors. This paper stems initially from a discussion on the feasibility and benefits/risks of forking a cryptocurrency. The information contained within this stretches far beyond one cryptocurrency (or “coin”) and applies across the cryptocurrency industry and ecosystem.

Many of the topics discussed in this paper are only touched on, and there is significant scope for future papers to expand on these topics. For simplicities sake (and to not turn this into a novel), each one is going to be described briefly so the reader can gain an understanding of context.

This paper outlines arguments for both sides of the discussion, along with empirical data to support these arguments. The intent is not for or against recommending one course of action over another, but rather to educate the reader in the many instances of when a fork could be justified or if the philosophical risks carry too much weight. Regardless what many may think in the crypto world (and beyond), there is almost never an issue that is black and white.

What is a fork?

When individuals talk of forking a coin, they could be referring to two separate things. The first one is forking the source code of a coin in order to modify the design, fix a bug or add in additional functionality that previously was not there (whether that is a feature such as extra security, or more along the lines of mentioned above i.e. forking to prevent malicious actors).

Nearly every alternative coin (altcoin, or simply “alt”) in existence is a code fork, a fork of Bitcoin, either directly such as Litecoin and Namecoin or indirectly such as Dogecoin forking from Luckycoin (itself a Litecoin fork). This is well known to those within the industry, but it isn’t really talked about and is rarely considered. Parameter, algorithm, and name changes are made,and the industry accepts the new fork as something brand new. However, technically speaking, what the crypto ecosystem really has is another rendition of Bitcoin. In terms of name changes they could easily be labeled Bitcoin – Litecoin, or Bitcoin – Dogecoin, an updated version to the Bitcoin Core client. Counter to that, once a forked coin (altcoin) grows a community and internal ecosystem, they could be considered separate. But the inception of said coin still has its roots firmly planted in the technology that Bitcoin gave to the world.

In the rare instances that coins are built from the ground up, they often still utilize the blockchain technology which launched Bitcoin’s fame (e.g. NXT and Ethereum). As such an argument can be made that these were indirectly forks from Bitcoin because the underlying technology is still used. Even with code built from the ground up, in the grand scheme of things these coins will still be considered by the industry as Bitcoin 2.0 coins, still lending credibility to Bitcoin.

The second type of fork is more of a matter of semantics, in which the code has already been forked and now the act of garnering support in order to gain equal to or greater than 51% consensus of the network on the newly forked code. The word fork has been used synonymously in this instance, partially because it is in the author’s view that it may potentially be easier to write the code then to get worldwide agreement that the newly written code should be adopted.

Discussing and truly understanding the forking of a coin is paramount to the rest of this paper, which will use real world examples of alt coins and the decisions to fork or not to fork.

PoW and PoS: Miners versus Exchanges

Decentralised cryptocurrencies require a protocol to be defined as to how blocks are secured, and how new coins are distributed, referred to as “mining”. Proof of Work (PoW) and Proof of Stake (PoS) are two of the most popular distribution methods today. There is no perfect distribution method for coins, and there are positives and negatives for each one of these methods as well as others.

The Proof of Work protocol was designed for Bitcoin1, and it rewards miners with generated coins, in return for them solving mathematically hard problems. The Proof of Stake distribution method was later introduced for Peercoin2, and it relies on the wallet software to mine for coins. In essence cryptocurrencies supporting the PoS distribution method have an option to “lock out” coins in that wallet, and based on factors such as how many coins are locked and age of coins, that wallet will generate new ones.

Technical details are beyond the scope of this paper, however, both are susceptible to a 51% attack on their respective networks. However, PoW 51% attacks come from concentrated mining power (jn the form of processing power) where PoS 51% attacks come from concentrated coin power (in the form of coins owned).

This means that PoW coins require that control of mining power is distributed across a number of independent entities (mining pools or individual miners). For PoS coins, the equivalent is that coins must be well distributed. For a PoS coin, exchanges are typically the largest holders of coins, and as such those cryptocurrencies must trust that when an exchange lists a particular coin, that exchange has enough security set up to prevent theft of coins via hacks.

There are clear examples of attacks succeeding on both protocols. There have been several instances where attacks on a PoW network have been carried out successfully such as Whitecoin3, and while performing research for this paper, it was discovered there was at least one documented case on a 51% attack on a PoS coin named Coin24.

Loss of confidence Effect

In the summer of 2014, the Dogecoin community was faced with a potentially serious issue. ASICs had been developed for Scrypt (the PoW hash algorithm used by both Litecoin and Dogecoin) and were being deployed in full force. At that time, the vast majority of this computational power was being pointed towards the Litecoin network while the Dogecoin network was receiving very little. There were fears within the Dogecoin community that it would be susceptible to a 51% attack once much more powerful ASICs were in mass production, or if an existing mining pool was hacked and its hashing power redirected.

This author published a paper addressing the Dogecoin community, titled “Dogecoin: An educational piece on Network Security”5. The paper detailed the options the Dogecoin community had and the pros and cons for each option, ultimately recommending that the Dogecoin developers’ least risky option was to implement Auxiliary Proof of Work (AUXPoW aka merged mining).

The paper also coined the term “The Loss of Confidence Effect”. Essentially, this term is what is used to describe the ramifications of a 51% attack on a coin’s network. An attack of this type on a network can be devastating for that network on a technical level, but the aftermath physiologically with those who own coins could potentially be more devastating. It is considered that the community members might ask themselves questions such as:

“If this can happen once, could it happen again?”

“Should I sell now before the value goes down even more?”

“Everyone is getting out, should I as well?”

These statements reflect the loss of confidence effect, where the collective masses question the reliability of the coins that they own and that coin’s network. This effect can arise in other situations as well, such as forking a coin.

MintPal and Bter.com: Exchanges hacked

On July 13th 2014, the MintPal exchange was hacked and 8 million of the Proof-of-Stake “Vericoin” currency were stolen (roughly 30% of all coins in existence at the time of the hack) 6. Given that not all coins will be staked at any given point in time, this could represent over 50% of all staked coins. Within days a code fork was released by the Vericoin developers, who used checkpoints to fork the blockchain prior to the hack. The developers worked with exchanges in ensure adoption of the new fork.

In addition to the MintPal hack, Bter.com was also hacked a month later on August 15th, 20157. In this hack, the malicious actors were able to liberate 50 million NXT from Bter.com. However as opposed to the Vericoin developers, the NXT community made the decision not to roll back after the hack.

Here we have two well known coins and unfortunate circumstances facing both. These decisions are not the sort to make lightly, and presumably the developers carefully considered the consequences of their choices. Interestingly enough, the decision from Vericoin came from the developers where the NXT decision came from the NXT community.

It is at this point where the reader needs to objectively evaluate the circumstances in each case. These are two separate communities, both under the crypto umbrella, looking to achieve success. Bold decisions had to be made, and made quickly. If the ultimate decision was to fork the blockchain, it needed to be done in a timely manner in order to minimise collateral damage from those who have sent coins to another wallet.

Shall a successful coin live with the possibility that a bad actor is out there with a large amount of coins? If the decision to not fork happens, not only is there the future risk of a 51% attack but there is also the risk of lower prices from malicious actors dumping ill gotten gains onto the market. Continuing a downward pressure until they have exhausted all coins they have received illegally. The other side of consideration is the future ramifications of rolling back a blockchain, crossing the “ethical boundary” where human interference in a decentralized economy shall not be crossed.

In addition, within the time between the hack and the rollback, there could have been many individuals that have sent coins to other entities. If these coins were sold for fiat, and effectively returned, one of those entities would receive both the fiat and coins (the definition of a physical double spend). These decisions are not taken lightly, and any coin that faces a situation such as this, regardless of the outcome, will walk away with a heavy heart asking themselves if it was the right thing to do.

Legal Rulings

Cryptocurrencies are a global technology, stretching beyond traditional borders and countries. However for the purposes of legal issues the US government laws and thoughts will be used since the author is US based and is not familiar with the legalities of crypto currencies within other countries.

There has been two US Federal institutions that have released rulings on cryptos (and it should be added that these statements are counter to each other), Financial Crimes Enforcement Network (“FinCEN”) and the Internal Revenue Service (“IRS”). The IRS treats cryptos as personal property for taxation purposes (March 25, 2014)8, while FinCEN states that cryptos much be treated like money (March 18, 2013)9. Confusing nonetheless for the industry as a whole, it is understandable why each entity made the decisions that they have made based on their scope of regulatory purview and enabling statutes.

FinCEN is tasked with ensuring that anti-money laundering (AML) and know your customer (KYC) laws and regulations are followed by those dealing with fiat as well as only cryptocurrencies (or as they called them, “digital currencies”). It is of the opinion of the author that since cryptos have sufficient liquidity and can be transferred easily internationally, FinCEN has opted to apply these laws to cryptos. In addition many political figures, banking representatives, and other financial institutions have also (unfoundedly) stated that cryptos are utilized primarily for illegal transactions such as funding terrorism. This in turn can bring attention such as rulings from federal entities.

The IRS needs to account for “income” such as cryptos, but how they go about doing it potentially could be a touchy subject. Besides the US Congress, no entity is allowed, by the US Constitution, to create laws governing what is and is not legal tender. The IRS is authorized by Congress to make rules regarding the collection and assessment of taxation in the United States and their delegated authority has led them to make rules that do not align with other federal agency determinations. This cobweb of sometimes conflicting determinations further confuses both industry and individual participants regarding cryptocurrencies and their legal status.Analysis of the ramifications of this are an area for potential future work.

With these two rulings, one should carry weight more than the other. FinCEN is merely applying existing fiat laws to cryptos while the IRS has dictated cryptos are property. Therefore, for the purposes of this paper cryptos will be considered property.

Connecting the Dots

There are a number of disparate but interacting factors in cryptocurrency economics, from forks to network attacks, loss of confidence effects and legal challenges. Evaluating the ecosystem is a significant challenge, and without a block diagram to notice the nuances of these “entities” it’s difficult to understand how they are intertwined.

This author will present a number of hypothetical situations in order to show the effect that the previous topics would have on such a network, and why it is important to consider all angles and points of view when discussing controversial topics such as the subject of this paper.

Hypothetical #1

To start, consider the following thought experiment; your local government has decided that Bitcoin has now become such a significant influence that it can no longer be ignored. In order to help Bitcoin, they have decided to purchase mining power in excess of 50% of the Bitcoin network to eliminate risk of malicious actors influencing the network..

Disregarding that Bitcoin is a worldwide currency, let’s say everyone falls under the same government. This government can now decide, pending the ability to assess the merit of individual transactions,which transactions to include in blocks and which ones to disallow.

Further, out hypothetical global government isn’t satisfied with having the majority of the network. Instead, they want to put into place a few additional rules in order to ensure everyone’s safety. With controlling interest in the network, this gives them the ability to fork the original Bitcoin code to their own version. This new version blacklists certain addresses that this government may not deem appropriate for general public such as pornography or gambling. In addition, some of these new rules that are put into place are in essence a software version of laws, dictating what those in the crypto atmosphere shall and shall not do.

So under this hypothetical situation, the masses are stuck between ideological differences. Should the masses adopt this new controlled and in essence centralized crypto or shall they fork over to a new code? There is no escape from this new government entity because they control 51% of more of the network, enforcing their new wallet code. So does everyone move to the new centralized control of this entity or does a majority of users remain on the “classic” fork and risk government intervention to maliciously fork the existing chain?. As mentioned at the start of this paper, this gives context into forking and perhaps going along with the trend, Bitcoin – Bitcoin could also be used. This is of critical importance to think of a fork this way, because it lends credibility to the new fork. (Keep in mind while the scenario mentions a government, it is entirely plausible to replace “government” with another entity with the means to do this, such as any individual person like Bill Gates or Richard Branson, or even a company who might have the purchasing power such as Overstock.)

It is easy to state that once an entity has a mining majority of a network, the majority will adopt changes they put forward. Considering the other side of the argument, the IRS has explicitly stated that cryptos are a commodity. FinCEN states that cryptos essentially need to be treated as money. So as far as the US government is concerned, cryptos are a real thing and no longer this “magic internet money”. One argument has been made that regardless of the coin (Bitcoin, Litecoin, Dogecoin, Blackcoin, DASH, etc), it is all now considered tangible and is property. So what gives the right for those out there to simply fork over to a new chain and potentially destroy the ability to utilize their coins? The words “ability to utilize” is specifically mentioned because a fork does not mean the destruction of said coins, where some people may fail to understand this. It’s only the ability of utilization that is affected.

Understand that this new fork does not affect only the entity in charge of the previous fork. This also affects those businesses and merchants that also abide by the same rules as the original blockchain. So now a new variable comes into play. Should the masses adopt the fork with new rules that they potentially goes against the original ideology of cryptos, or do they fork and risk the backing of businesses that those in crypto depend on for a medium of utilization? These businesses depend on following all applicable laws, be it AML/KYC laws, tax laws, or any others that are pertinent.

This example is the perfect scenario to describe a rouge blockchain, one that is mined by an entity/malicious actor who also wishes to blacklist addresses as they see fit or control the network. There is however, the other side of the coin so to speak (pun intended). A new coin created which does not have a significant market cap or merchant adoption, but has blood sweat and tears poured into it by developers and community members.

Hypothetical #2

We are going to call this other coin and its associated blockchain NewCryptoCoin (not to be associated with any existing coin, and as far as this author is aware of there is not a coin by that name). The market cap is fairly small, but the community backing it is substantial. Further this coin has shown the ability to reach out to a considerable large amount of non crypto people and has helped adoption. Naturally as with any coin, there are trolls and detractors, the vast majority claiming it’s just another worthless altcoin.

NewCryptoCoin recently ran into an issue, where it is susceptible to a 51% attack. Havoc ensues and the attacker has performed additional malicious attacks on the network such as double spend. This altcoin is on a few exchanges as well, and all exchange wallets have been frozen. It seems that the loss of confidence affect has taken place, and mass panic follows.

Ignoring any technical details, in order to alleviate the network from such attacks NewCryptoCoin developers have made the ultimate decision to fork the blockchain and roll it back to before the attacks happened. Crypto enthusiasts have claimed doom and gloom, stating that forking to roll back is antithetic to the idea of crypto currencies and that this crypto should just die off. As shown above, Vericoin was such a coin that faced this unfortunate circumstance. And today it is a flourishing community of supporters and developers (who recently just released a white paper on a new type of distribution method).

So what shall a blockchain do? Does a coin fork for survival, or does it allow itself to die in order to preserve the integrity of itself? Does the popularity of a coin dictate if it should fork? Or a better question, should the unpopularity of a coin dictate if it should fork?

Final Thoughts from the Author

The legal issues are complex and significant, and lawmakers have shown themselves willing to introduce legislation in order to promote their own agenda or that of industry interests (typically indicated via lobbyists). For all of those in cryptos, it is our civic duty to educate those lawmakers across the world as traders, miners, businesses, and everything in between. We as a community should be having informed discussions, evaluating the impacts of decisions made today and potential fall out in the future. One of the largest legal issues involved in this paper is the implications of forking and what impact it will have in future legislation.

Detailed predictions are beyond the scope of this paper, but perhaps legislation will be targeted towards businesses and their ability to accept cryptos. In turn, the risks of forking a blockchain has increased so greatly that it puts those within the community in a position between what people have dubbed financial freedom and utilization of cryptos beyond simple person to person barter (a secondary effect to enacted laws). If the decision was made to fork with such legislation, the effect of it could potentially ripple throughout the ecosystem and cause the years of hard work to be set back in terms of mass adoption.

It is in this author’s opinion that there are certain extenuating circumstances which do in fact justify the need to either perform a rollback on a blockchain. If an event takes place that threatens the livelihood of a coin, it is perfectly logical to perform such actions in order to continue the success of the coin and the ecosystem surrounding it.

Further, this author also believes that the popularity of a coin is inversely proportional to the affect said coin has in terms of notability. One of the largest arguments against a blockchain rollback is that it is sacred territory. Tantamount to gaining attention of regulators in order to give them more fodder in order to enact new laws. Or worse yet, a slippery slope in which one developer or group of developers have done it once, it will happen more often. However as shown above there are hypothetical situations where groups could get involved with Bitcoin, the most well known cryptocurrency, and turn the direction of it for their own purposes. This in turn could cause it to mutate it into something unrecognizable by today’s standards and against the original purpose that Satoshi created it for.

If today a total of 10 people have heard of NewCryptoCoin and have mined the coin, and one person out of 10 decided to take over the network for nefarious purposes, how would anyone know if the developers performed a roll back? The attention would be minimal at best. More well known coins such as Vericoin may have crossed the so called crypto-ethical boundary by forking a blockchain, but without so potentially could have destroyed the coin that so many have worked so hard to create. A domino effect could have ensued and caused many within the Vericoin community to abandon ship (developers included). Then again, as this paper was being written the Vericoin developers have created a new distribution method called “PoST”10, which is attributed to the original MintPal. A silver lining in the clouds, where once again those within the crypto community transform a past tragedy into a present boon for the collective crypto communities.

There is certainly no shortage of opinions in heated debates of topics. From politics to religion and everything in between, it is human nature to take sides. The purpose of this paper is essentially not to take sides, but instead to discuss and focus on past and potential future events that shape the dynamics of the industry. The decisions we as a community make today are bound to have an effect on laws and the moral compass of developers and communities. Having the ability to consider all sides and think objectively is critical in order to grow. And as stated at the beginning, there is nearly never an issue that is black and white but there are multiple shades of grey.

Acknowledgments:

I would like to thank Ross Nicoll and Rishi Nair for editing this paper and providing reviewer comments. I would also like to thank the Digital Currency Council for editing and hosting this paper.